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Fingerhut Fixing Credit Mess

Lately it seems that the only news Fingerhut Cos. could report was bad news. Following a rise in bad consumer debt, in October the company announced plans to lay off 24% of its staff – 550 employees – by the end of January to save $40 million in overhead.

Although sales of Fingerhut’s apparel books, which include Arizona Mail Order and Lew Magram, showed solid growth this past holiday season, the company’s dismal state of affairs gave rise to rumors that parent company Federated Department Stores, which had bought it just two years earlier, was looking to unload Fingerhut.

For its part, Federated has given no indication that it plans to sell Fingerhut. And Fingerhut president/chief marketing officer Michael Sherman says the cataloger is already on the road to recovery. The company, which with its core general-merchandise catalog and Fingerhut-brand spin-offs extends credit to lower-income consumers, has already made significant strides to lower its delinquency rates, he says.

Credit shift blunder Fingerhut’s credit problems began in April 1999 when it shifted from using an installment credit plan, in which customers receive payment-coupon books such as with a mortgage or a car loan, and pay a fixed amount each month, to an open-ended, or revolving, credit plan. It also began extending credit to higher-risk prospects.

A little more than a year later, Fingerhut had lost up to $400 million in unpaid credit-card payments from customers who were delinquent with their payments.

Fingerhut’s executives “assumed that the customer would behave the same under both [credit] methods,” says Brian James, a retail analyst for the Boston-based investment firm Loomis, Sayles & Co. “But they were wrong, and their mistake was to roll out the program before properly testing it.”

This past fall, however, Fingerhut began sharpening its risk strategies. For starters, it reduced mailings to an unspecified number of its high-risk customers.

“We’re being more careful in credit-line management and with particular risk groups,” Sherman says. “We’re also developing and implementing new credit-decision and credit-granting models,” to reduce the amount of credit the cataloger extends to high-risk customers. “Part of the problem was that we didn’t have as many credit tool kits as we needed. Now we do.”

Although he won’t specify how, Sherman says that the company is also gathering more accurate customer data from credit bureaus “so that we can now understand profitability by credit-risk segment and know by credit segment where we’re making our money.”

Drumming up catalog sales As part of its strategy of mailing fewer catalogs to higher-risk consumers, Fingerhut cut holiday circulation of its core book by an undisclosed amount. That, in turn, produced lower-than-expected sales.

“We didn’t make our plan,” Sherman admits. “But we took our sales to lower levels to understand the credit situation better. As soon as we have a couple of quarters under our belt this year, I believe we can see when we’ll try to get the Fingerhut catalog back to its historic sales levels.” When Federated bought Fingerhut in February 1999, the cataloger’s total sales were $1.6 billion.

Besides, Sherman says, the situation at Fingerhut wasn’t as dire as some made it appear. For all the troubles with the core title, the company’s apparel books have been beating expectations. The Arizona Mail Order titles, Bedford Fair, Lew Magram, and Brownstone Studio, all of which were acquired within the past three years, enjoyed “double-digit” sales increases in 2000, Sherman says.

This year, Sherman expects apparel sales to exceed $350 million. The Arizona Mail Order books, which include Old Pueblo Traders, Coward Shoe, and Regalia, will account for more than one-third of that revenue; Bedford Fair is expected to bring in another $100 million.

“We’ve had no credit problems with our apparel catalogs,” Sherman says. Compared to Fingerhut buyers, the apparel customers are older and don’t use credit as much, and they pay off bills faster than Fingerhut buyers. “We expect continuous double-digit growth in apparel,” and will aggressively boost catalog circulation, Sherman says.

Observers remain skeptical Despite Sherman’s talk of strong apparel sales and tighter credit-risk management, analysts and investors are unconvinced that Federated should have even bought Fingerhut in the first place. The $1.87 billion catalog division of Federated, which owns such upscale and midscale retail chains as Bloomingdale’s, Macy’s, and Bon Marche, paid $1.7 billion for Fingerhut. Federated felt that Fingerhut’s existing back-end facilities would better enable the parent company to grow its own catalog and Internet businesses, which include Bloomingdale’s by Mail and Macys.com.

But “there’s no strategic fit between Fingerhut and the base Macy’s/Bloomingdale’s business,” says Loomis, Sayles & Co.’s James. “And the other Fingerhut catalog businesses are too small for me to care about.”

Nonetheless, “Federated is doing the right thing by trying to fix Fingerhut before selling it,” James says. “Federated will fix it during the next 12 months and then spin it off or sell it, which is what it should do.”

Some believe Federated should even get rid of the smaller apparel catalogs under Fingerhut. “They’re far too small to make a difference and have no brand equity,” says Jeff Stein, managing director for Cleveland-based McDonald Investments.

Fingerhut management is ignoring rumors of any sale and concentrating on the business at hand: a complete turnaround. “We’re working on that now,” Sherman says, though he can’t specify a time frame: After a few quarters, “we’ll demonstrate that we’ve fixed things here. Then we’ll gear up for growth.”

Four years after putting Edmund Scientific on the selling block, Edmund Optics has sold the $10 million science hobbyists catalog to Science Kit & Boreal Laboratories (SK), a division of $1.46 billion laboratory supplies cataloger VWR Scientific Products. Terms were not disclosed.

The $48 million Barrington, NJ-based Edmund Optics is retaining its core title, business-to-business catalog Edmund Industrial Optics. “The growth rates were faster on our optical b-to-b business,” says Nicole Edmund, vice president of marketing. “So with a limited amount of resources, we wanted to stick with what was giving us our greatest return.”

Edmund Scientific, which targets some educators in addition to hobbyists, will retain its name under the $50 million SK. “The Edmund Scientific name has a lot of history,” says Randy Burkard, president of Tonawanda, NY-based SK.

Burkard says his company plans to share an as yet undetermined number of Edmund products with three SK catalogs that mail to teachers. At the same time, some items from the existing SK catalogs will be added to the Edmund book. But the company does not plan to mail Edmund books to the SK lists or SK books to the Edmund house file.

B-TO-B A BETTER BET Until the early 1980s, Edmund Scientific had been the cataloger’s flagship book. But during the past 20 years, Edmund Optics de-emphasized it in favor of its Edmund Industrial Optics catalog, which sells optical and imaging component solutions to semiconductor, telecommunication, and medical professionals. Whereas Edmund Scientific accounted for 75%-80% of the company’s sales in 1980-81, by this year it accounted for only 20% of overall sales.

“The Scientific side of the business needed the leadership and entrepreneurial spirit to take it to the next level,” Edmund says. “That’s why we think VWR was a good fit.”

Fingerhut Fixing Credit Mess

Fingerhut president Michael Sherman: ‘We can now understand profitability by credit-risk segment.’

Lately it seems that the only news Fingerhut Cos. could report was bad news. Following a rise in bad consumer debt, in October the company announced plans to lay off 24% of its staff — 550 employees — by the end of January to save $40 million in overhead.

Although sales of Fingerhut’s apparel books, which include Arizona Mail Order and Lew Magram, showed solid growth this past holiday season, the company’s dismal state of affairs gave rise to rumors that parent company Federated Department Stores, which had bought it just two years earlier, was looking to unload Fingerhut.

For its part, Federated has given no indication that it plans to sell Fingerhut. And Fingerhut president/chief marketing officer Michael Sherman says the cataloger is already on the road to recovery. The company, which with its core general-merchandise catalog and Fingerhut-brand spin-offs extends credit to lower-income consumers, has already made significant strides to lower its delinquency rates, he says.

Credit shift blunder

Fingerhut’s credit problems began in April 1999 when it shifted from using an installment credit plan, in which customers receive payment-coupon books such as with a mortgage or a car loan, and pay a fixed amount each month, to an open-ended, or revolving, credit plan. It also began extending credit to higher-risk prospects.

A little more than a year later, Fingerhut had lost up to $400 million in unpaid credit-card payments from customers who were delinquent with their payments.

Fingerhut’s executives “assumed that the customer would behave the same under both [credit] methods,” says Brian James, a retail analyst for the Boston-based investment firm Loomis, Sayles & Co. “But they were wrong, and their mistake was to roll out the program before properly testing it.”

This past fall, however, Fingerhut began sharpening its risk strategies. For starters, it reduced mailings to an unspecified number of its high-risk customers.

“We’re being more careful in credit-line management and with particular risk groups,” Sherman says. “We’re also developing and implementing new credit-decision and credit-granting models,” to reduce the amount of credit the cataloger extends to high-risk customers. “Part of the problem was that we didn’t have as many credit tool kits as we needed. Now we do.”

Although he won’t specify how, Sherman says that the company is also gathering more accurate customer data from credit bureaus “so that we can now understand profitability by credit-risk segment and know by credit segment where we’re making our money.”

Drumming up catalog sales

As part of its strategy of mailing fewer catalogs to higher-risk consumers, Fingerhut cut holiday circulation of its core book by an undisclosed amount. That, in turn, produced lower-than-expected sales.

“We didn’t make our plan,” Sherman admits. “But we took our sales to lower levels to understand the credit situation better. As soon as we have a couple of quarters under our belt this year, I believe we can see when we’ll try to get the Fingerhut catalog back to its historic sales levels.” When Federated bought Fingerhut in February 1999, the cataloger’s total sales were $1.6 billion.

Besides, Sherman says, the situation at Fingerhut wasn’t as dire as some made it appear. For all the troubles with the core title, the company’s apparel books have been beating expectations. The Arizona Mail Order titles, Bedford Fair, Lew Magram, and Brownstone Studio, all of which were acquired within the past three years, enjoyed “double-digit” sales increases in 2000, Sherman says.

This year, Sherman expects apparel sales to exceed $350 million. The Arizona Mail Order books, which include Old Pueblo Traders, Coward Shoe, and Regalia, will account for more than one-third of that revenue; Bedford Fair is expected to bring in another $100 million.

“We’ve had no credit problems with our apparel catalogs,” Sherman says. Compared to Fingerhut buyers, the apparel customers are older and don’t use credit as much, and they pay off bills faster than Fingerhut buyers. “We expect continuous double-digit growth in apparel,” and will aggressively boost catalog circulation, Sherman says.

Observers remain skeptical

Despite Sherman’s talk of strong apparel sales and tighter credit-risk management, analysts and investors are unconvinced that Federated should have even bought Fingerhut in the first place. The $1.87 billion catalog division of Federated, which owns such upscale and midscale retail chains as Bloomingdale’s, Macy’s, and Bon Marche, paid $1.7 billion for Fingerhut. Federated felt that Fingerhut’s existing back-end facilities would better enable the parent company to grow its own catalog and Internet businesses, which include Bloomingdale’s by Mail and Macys.com.

Nonetheless, “Federated is doing the right thing by trying to fix Fingerhut before selling it,” James says. “Federated will fix it during the next 12 months and then spin it off or sell it, which is what it should do.”

Some believe Federated should even get rid of the smaller apparel catalogs under Fingerhut. “They’re far too small to make a difference and have no brand equity,” says Jeff Stein, managing director for Cleveland-based McDonald Investments.

Fingerhut management is ignoring rumors of any sale and concentrating on the business at hand: a complete turnaround. “We’re working on that now,” Sherman says, though he can’t specify a time frame: After a few quarters, “we’ll demonstrate that we’ve fixed things here. Then we’ll gear up for growth.”